Mag Mile's Changing Face

While Official Vacancy Rate Remains Low, High Costs Have Forced Some Tenants To Sub-lease Their High-profile Retail Space.

Some Softness Detected In Rents

January 23, 1999|By Susan Chandler, Tribune Staff Writer.

The Magnificent Mile is looking a little bedraggled these days.

Large tenants such as the Viacom Entertainment Store and Planet Hollywood International have spent 10 months looking for new tenants to take over their pricey leases on North Michigan Avenue. So far, no deals have been announced.

And during that time, menswear retailer Bigsby & Kruthers has decided to close its stores at Water Tower Place and down the street at 605 N. Michigan Ave.

Officially, the vacancy rate for North Michigan Avenue retail space is a tiny 1.3 percent. That's the lowest rate since 1991, according to an annual survey by Northern Realty Group, a Chicago retail real estate brokerage and consulting firm.

But add in the large retail spaces being shopped around, and the vacancy rate soars to more than 6 percent, the highest level since 1992, when the economy was coming out of a recession.

That softness is particularly puzzling considering that 1998 was one of the strongest years for retailers in recent memory, and Michigan Avenue remains the city's premier shopping venue. And the situation will only worsen as John Buck Co. woos tenants for its Nordstrom development, slated to debut in late 2000. An additional 115,000 square feet of retail space will be located directly on the Mag Mile at 520 N. Michigan Ave..

But the changing dynamics on Michigan Avenue already are being felt, real estate agents say.

Rents on spaces above the coveted ground floor are coming down. Tenants who are trying to dump their leases no longer expect to come out whole. And landlords are becoming more willing to reconfigure giant spaces for several tenants.

"We're seeing a general softness in demand for retail real estate because people aren't expanding as aggressively. We're also seeing a general softness in rents," said Bruce Kaplan, president of Northern Realty.

It's about time, says Gene Silverberg, chief executive of Bigsby.

His Chicago-based company is retrenching to three stores in Northbrook, Oak Brook and Lincoln Park because of the high cost of downtown rents. Nowhere is the rent higher than on Bigsby's flagship store at 605 N. Michigan Ave. Bigsby's $1.4 million-a-year rent represented about 17 percent of the store's sales, much higher than the 10 percent rent-to-sales ratio considered prudent.

"Under normal conditions, we would be there today selling suits," Silverberg said. "Michigan Avenue space is no longer for mortals."

Some believe that what's happening is a natural shakeout.

Because there are more retailers that want Michigan Avenue exposure than there is space, rents have soared.

Some landlords are charging $200 per square foot for ground-floor space on Michigan Avenue compared with $50 per square foot for space on State Street, real estate brokers say.

Add in hefty property taxes, and some retailers have to generate sales of $1,000 per square foot to make an adequate return. Michigan Avenue's tony tenants generate average sales of about half of that, or between $450 and $500 per square foot.

Last November, Polo Ralph Lauren unveiled its largest flagship in the world at 750 N. Michigan Ave. And around the corner at 111 E. Chicago Ave., Mattel Inc. opened its first American Girl Place store in the country.

Across the street, Saks Inc. is building a new men's store in the former Tiffany space at 717 N. Michigan Ave. And Walt Disney Co. is expanding with a new Disney Store at the same address.

It's all part of the Magnificent Mile's natural evolution, says Russ Salzman, executive director of the Greater North Michigan Avenue Association.

"It would be incorrect to say there's a problem on Michigan Avenue because the Viacom store isn't booked up the day after it closed. There remains hundreds of enterprises that would like to be on Michigan Avenue," Salzman said.

The Mag Mile's rents are high by Midwest standards, but they are still a bargain compared with other high-profile shopping districts in cities such as New York and Hong Kong, which boast many of the same stores, Salzman said.